Norwegian Bases Long-Haul Plan On 787

Norwegian's CEO Bjorn Kjos has a clear vision: “You have to be a niche player or a global player.” Quite deliberately, he has decided his airline will be—both.

The carrier is not only Europe's fastest-growing low-cost carrier, it is also entering another stage of its development, one that will be crucial for its long-term future. Norwegian will become the first of the current generation of European LCCs to enter the long-haul market on May 30 with the launch of services to New York and Bangkok. Both cities will be served from Oslo and Stockholm. Several additional routes are to follow soon, among them Fort Lauderdale, Fla., from Stockholm and Copenhagen, in the fall. And Kjos is convinced Norwegian will not remain alone: “We will be the first to build up a long-haul low-cost carrier in Europe, but there will be plenty of them around, just wait and see,” he tells Aviation Week in his Oslo office.

Many have tried this approach, but fell short. Freddy Laker's famous Skytrain, an early predecessor of today's airlines, failed in the 1982. More recent examples include Oasis Hongkong and Air Asia X—Oasis has shut down and the Malaysian carrier has curtailed its long-haul network. “I have never actually understood how Air Asia X could think of flying long-haul low-cost using an AirbusA340,” Kjos says. “It is as stupid as for a short-haul LCC to fly MD-80s. It does not work because it is way too expensive.”

Ironically, Norwegian is forced to launch long-haul service using a wet-lease A340 itself after Boeing delayed delivery of Norwegian's first widebodies. But that is only an interim fix. Kjos believes the defining factor will be the Boeing 787. Norwegian will take the first of eight on firm order at the end of June. “The 787 will be incredibly good in terms of fuel burn and maintenance so we will have extremely low-costs.”

Norwegian plans to operate its 787-8s in a 291-seat configuration. There will be 37 premium seats up-front featuring a 42-in. pitch, and the economy-class will offer the industry-standard 31 in.

Norwegian will need a healthy cost advantage because shifting a larger part of revenues is an idea other airlines have had. Many players believe they should aim for greater exposure on long-haul to reduce their dependence on the weak intra-European market. Of course, Kjos has a slightly different view: “Short-haul is not difficult, that is where we earn our money. You just have to run a very tight ship.”

The grand plan began with Kjos—who turned a failing airline into one of Europe's most promising carriers—and he continues to hold the reins. Once a fighter pilot in the Norwegian air force and later a lawyer, Kjos was involved in rewriting the business model for Norwegian's predecessor, which was a regional feeder for SAS Scandinavian Airlines. When he did not find investors, he put his own money into the airline and became its CEO. Kjos is still a significant minority shareholder. Because he is so soft-spoken, some may tend to underestimate him—but not those with whom he has done business. He is a tough negotiator, both with suppliers and unions, and has a strong focus on cost control.

Norwegian's move into long-haul has to be seen in the broader perspective of the company's recent development. “We started as a Norwegian company, became a Scandinavian, then Nordic, then pan-European company. I think that is the way things will go for all airlines. They have to think global and compete in a much larger market.”

As far as its network is concerned, the routes have so far almost exclusively originated in Scandinavia. However, when Norwegian placed its massive orders for a 100 Airbus A320NEOs and 100 Boeing 737 MAXs (not to forget another 64 outstanding deliveries for 737-800s from a previous order), it became increasingly clear that the airline's ambitions went beyond connecting Scandinavia with the rest of Europe.

And now Norwegian is taking the first concrete steps to become truly pan-European. Last month, Kjos announced 15 routes from a new base at London Gatwick Airport, currently a stronghold for EasyJet. Tromso in northern Norway is the only Scandinavian destination, the rest are leisure markets in Southern Europe—Spain, Italy and Croatia. Last week Norwegian announced similar plans to grow its presence in Germany. From November onward, the company will enter 11 new markets from three German airports (Cologne, Munich and Hamburg) to a total of four destinations in Spanish territory (Malaga, Alicante, Gran Canaria and Tenerife). It will be a cautious start in the sense that frequencies will be limited to 2-3 weekly services, but there is more to come, given its backlog of capacity on firm order.

There is considerable risk involved. Norwegian is leaving its relatively protected niche in Scandinavia and is increasingly competing head-to-head with the other pan-European low-cost carriers, EasyJet and Ryanair. Norwegian's addition of more destinations within Europe does not yet have much of an impact on the legacy carriers, which have long pulled out of many of the routes Norwegian is targeting. The mega-order has also been a gamble for the airline as to whether there will be room in markets it has not previously served.

For now, Norwegian seems to be handling its huge growth spurt relatively well. In 2012, the company made a 632 million krone ($108 million) pre-tax profit on sales of 12.9 billion krone. Revenues increased by 22% as the airline carried 13% more passengers. In the first quarter of 2013, the airline posted a 160 million krone pre-tax loss, common for the season and much reduced compared to first-quarter 2012, so there are clear signs of improving financials.

The move into pan-European flying is not only a consequence of having to place a large amount of new aircraft, it is also a way of escaping the traditionally very high labor costs of Scandinavia. The airline is outsourcing most work, where feasible, to different parts of Europe. Some of the back-office functions have been moved to Latvia and Ukraine. Crews operating the Bangkok service will be based in Thailand, not Norway, to take advantage of lower labor rates.

But the Bangkok crew base offers more than a cost saving. “The main thing is the large streams of people flying from the Far East to Europe,” Kjos says. Norwegian's long-haul venture is not so much about Europeans going to Asia or to North America, but about Asians visiting Europe.

With travel patterns shifting, Kjos is betting that smaller long-haul hubs will disappear and be replaced by direct long-haul services where the market is big enough and can be stimulated by lower fares. “Direct long-haul will be cheap to fly.” At the same time, Norwegian is making a point of avoiding the large long-haul catchment areas in Europe of strong incumbents like Air France, British Airways and Lufthansa.

Kjos does not buy into the argument that the long-haul low-cost model will not work because there are few ways to achieve the same cost differences that distinguish LCCs from legacy carriers on shorter routes. “It is correct to a certain degree that on long-haul routes the cost advantage is smaller,” he concedes. “But on the other hand, when it comes to the 737-800, SAS has double the costs of Norwegian. But our infrastructure is paid for by the 737 and we earn money. I would be doing something wrong if I didn't have substantially lower costs than my competitors.”

So far, Norwegian primarily competes with SAS in its home market. The partially state-owned airline narrowly managed to escape bankruptcy earlier this year when unions agreed to extensive cost cuts at the last minute. And Kjos is quite happy about it: “I hope SAS will survive. The market is too big for us and if SAS disappears there will be a better competitor coming in.”

Norwegian's short-haul model is not the rock-bottom cost approach that Ryanair takes. The latter allows connections within its own network, but has so far abstained from interlining or code-sharing with others. Because the carrier already operates such a vast European network, it does not need another airline to feed the new long-haul services, at least not on the European end of its routes.

Even on narrowbody aircraft, Norwegian has begun to offer free wireless Internet access. That is of value to its passengers because its average segment length is quite significant. There are a lot of 5-6-hr. flights from Norway to the Canary Islands; the company even serves Dubai in the winter. And Kjos argues that Norwegian gains more from offering Wi-Fi for free, thereby attracting more passengers, than charging for the service.

“Longer sectors are part of our strategy,” Kjos explains. “The longer the sectors are, the lower the cost per available seat kilometer.” In first-quarter 2013, Norwegian carried 8% more passengers, but revenue passenger miles were up 19%, reflecting that trend. Kjos claims that the only reason Ryanair's unit costs are below Norwegian's is because their average stage length is even shorter.